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Transcocean Ltd: Still A Turnaround Play

June 23, 2014 | About:
cody56

cody56

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1. The Company

Transcocean Ltd (RIG) is one of the largest offshore drilling contractors in the world. The company rents floating mobile drilling rigs, along with the equipment and personnel for operation for oil and gas companies. Transcocean day rate range from $287,700 to as high as $650,000 for its deepwater drillships. The company has over 135 offshore drilling units and two ultra-deepwater units undercontruction as of 2011. It owns nearly half of the 50 deepwater platforms in the world.

1.1 Company History

The company traces its roots back to 1953, when the Birmingham, Alabama based Southern National Gas Company that created the Offshore Company after acquiring a joint drilling operation. In 1954 the company launched its first Jackup rig in the Gulf of Mexico and went public in 1967. In 1978 SNG turned the company into a wholly-owned subsidiary. The name of the company was changed to Sonat Offshore Drilling Inc. Sonat spun-off the company in 1993 and in 1996 it was a acquired by Nowegian group Transcocean ASA for $1.5 billion. Transcosean started in the 1970's as a whaling company and expanded its business beyond whaling through a series of mergers. The company called its new acquisition Transcocean Offshore and the new company began to building massive drilling operations with drills capable of going 10,000 feet. It first ship the Discoverer Enterprise cost nearly $430 million dollars, could operate two drills and is the largest of the drill ships. In 2002 Transocean acquired R&B Falcon for $17.7 billion. That acquistion gave the company control of what at that time was the world's largest offshore operation.

2.Turnaround

The company earnings have floundered during the past two years, and has begun to turn its around. It when from losing $5.7 billion in 2011 and losing $219 million. The company has been struggling due to over aged rigs, decreases in day rates for their drilling rigs, and its involvement with the BP oil spill. It has turn it around by be profitable in each of the first three quarters of 2013 and reporting a net income $1.7 billion. In the third quarter of 2013 the company reported revenues of $2.56 billion up from $2.43 billion in the third quarter of 2012. The company net income was $546 million up from $-381 million in the same third quarter of 2012. It day rates have increased from $376,200 per day to $392,000 per day. It decreased it debt by $2.92 billion and saw a free cash flow of $237 million.

2.2 Finances

For the three months ending in March, revenues increased 7% to $2.34 Billion and net income before extraordinary items increased 63% to $530 million. Reveneus that reflect contract drilling segement has increased by 7% to $2.2 billion and other segments increased 21% to $46 million.

Balance Sheet

2013

31/12

2012

31/12

2011

31/12

2010

31/12

Total Current Assets 6772 8647 7536 6198
Cash and Short Term Investments 3084 4669 4017 3354
Cash - - - -
Cash & Equivalents 3084 4669 4017 3354
Short Term Investments - - - -
Total Receivables, Net 2162 2200 2176 1843
Accounts Receivables - Trade, Net 2112 1940 2049 1653
Total Inventory 743 610 529 514
Prepaid Expenses - - - -
Other Current Assets, Total 783 1168 814 487
Total Assets 32546 34255 35032 36814
Property/Plant/Equipment, Total - Net 21707 20880 20788 21319
Property/Plant/Equipment, Total - Gross 29427 27998 27085 28935
Accumulated Depreciation, Total -7720 -7118 -6297 -7616
Goodwill, Net 2987 2987 3217 8132
Intangibles, Net - - - -
Long Term Investments - - - -
Note Receivable - Long Term - - - -
Other Long Term Assets, Total 1080 1741 3491 1165
Other Assets, Total - - - -
Total Current Liabilities 3554 5463 5528 3996
Accounts Payable 1106 1047 880 832
Payable/Accrued - - - -
Accrued Expenses 539 543 460 -
Notes Payable/Short Term Debt - - - -
Current Port. of LT Debt/Capital Leases 323 1367 2187 2160
Other Current liabilities, Total 1586 2506 2001 1004
Total Liabilities 15855 18510 19395 15466
Total Long Term Debt 10379 11092 11349 9061
Long Term Debt 10379 11092 11349 9061
Capital Lease Obligations - - - -
Total Debt 10702 12459 13536 11221
Deferred Income Tax 374 366 487 585
Minority Interest -6 -15 106 33
Other Liabilities, Total 1554 1604 1925 1791
Total Equity 16691 15745 15637 21348
Redeemable Preferred Stock, Total - - - -
Preferred Stock - Non Redeemable, Net - - - -
Common Stock, Total 5147 5130 4982 4482
Additional Paid-In Capital 6784 7521 7211 7504
Retained Earnings (Accumulated Deficit) 5262 3855 4180 9934
Treasury Stock - Common -240 -240 -240 -240
ESOP Debt Guarantee - - - -
Unrealized Gain (Loss) - - - -
Other Equity, Total -262 -521 -496 -332
Total Liabilities & Shareholders' Equity 32546 34255 35032 36814
Total Common Shares Outstanding 360.76 359.51 349.81 319.08
Total Preferred Shares Outstanding - - - -

Cash Flow Statements

2013

31/12

2012

31/12

2011

31/12

2010

31/12

Period Length: 12 Months 12 Months 12 Months 12 Months
Net Income/Starting Line 1407 -211 -5677 969
Cash From Operating Activities 1918 2708 1825 3906
Depreciation/Depletion 1109 1123 1109 1009
Amortization - - - -
Deferred Taxes -9 -133 -62 -104
Non-Cash Items 231 1386 5729 1527
Cash Receipts - - - -
Cash Payments - - - -
Cash Taxes Paid 457 347 338 493
Cash Interest Paid 669 719 501 455
Changes in Working Capital -820 543 726 505
Cash From Investing Activities -1658 -389 -1896 -721
Capital Expenditures -2238 -1303 -974 -1349
Other Investing Cash Flow Items, Total 580 914 -922 628
Cash From Financing Activities -2151 -1202 734 -961
Financing Cash Flow Items -638 -297 -875 -17
Total Cash Dividends Paid - - - -
Issuance (Retirement) of Stock, Net - - 1211 -240
Issuance (Retirement) of Debt, Net -1513 -905 398 -704
Foreign Exchange Effects - - - -
Net Change in Cash -1891 1117 663 2224

3. Catalyst

Activist Investor

Starting in 2013, activist investor Carl Icahn (Trades, Portfolio) accrued about $1.15 billion stake of of the company accounting for about 6% of of the company's shares outstanding. Carl Icahn (Trades, Portfolio) started his campaign to get Transocean to change by increasing shareholder dividends from $2.24 dollars to $4.00 per share. In Nov. 2013 the company proposed to raised its dividends to $3.00 per share to be paid in 2014-2015. The second change Icahn wanted was for the company to change its business plan. He wanted to increase to the company's margins by increasing cost cutting measures by 2015 to $800 million and the board agreed to do that. The third and final change he wanted was for the company to spin-off some of the company's assets into a master limited partnership. It gave into Carl Icahn (Trades, Portfolio) and agreed to do a initial public offering for an master limited partnership in 2014.

4. Valuation

Transocean is selling not just at its 52-week low but at a 5-year low. The company has improved margins, increased its dividends and its cost cutting measures. It is worth more then $40 per share it worth about $57 per share based on increased earnings, cost cutting, better efficiency, and a large dividend increase. With gross margins of 40%, operating margins of 25% and net margins of 16% shows that the company is highly profitable in the oil rig business. It sell for only 10x its earnings while the industry average is 25x earnings. It is clear that Transcocean is undervalued and should trade up to higher multiples like 13x to 15x its earnings is reasonable for a profitable business that has management seeking to cut cost and improve margins.

5. Risk

The risk the company is currently external is a risk that is being created by the problems in the Middle East. WIth Iraq on failling to apart the oil markets will have massive shocks from rising oil prices and potential distributions in the market caused if ICIC's takes over Iraq.


Rating: 5.0/5 (1 vote)

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